No, We Didn't Change the Formula

A friend of ours, who uses the Percent Buy Index (PBI) as part of a timing methodology, asked me with some frustration, "Carl, have you changed the formula?" Below is the chart to which he was referring, and, as you can see the PBI has been extremely flat for a year.

The PBI measures the percentage of stocks in a specific market index that are on Price Momentum (PMM) BUY signals. PMM signals are considered to be intermediate-term in scope, and they are generated when price moves 10 percent opposite the direction of the signal AND crosses the 200EMA. We display the PBI on a full scale of zero to 100, so that we have an immediate impression of its position within the full range.

For the last year price volatility has been unusually low, and PMM signals for the component stocks in the S&P 500 Index have been accordingly stable. This is not normal and is probably caused by Federal Reserve policy.

When we zoom out to a five-year view of the indicator. Typically, when the PBI tops in the 80% to 90% range, a price top follows. While this has kind of been happening for the last year, the resulting corrections have been minor.

Bottom Line: To answer my friend, no we did not change the formula -- the Fed changed its formula. Regardless, the PBI is doing its job of showing us that there is broad internal support for the rally.

About the author:Carl Swenlin is a veteran technical analyst who has been actively engaged in market analysis since 1981. A pioneer in the creation of online technical resources, he was president and founder of DecisionPoint.com, one of the premier market timing and technical analysis websites on the web. DecisionPoint specializes in stock market indicators and charting. Since DecisionPoint merged with StockCharts.com in 2013, Carl has served a consulting technical analyst and blog contributor.
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